Fair Trade Without The Froth - WordPress

Fair Trade Without the Froth

Fair Trade Without the FrothA Dispassionate Economic Analysis of‘Fair Trade’SUSHIL MOHANThe Institute of Economic Affairs

contentsFirst published in Great Britain in 2010 byThe Institute of Economic Affairs2 Lord North StreetWestminsterLondon sw1p 3lbin association with Profile Books LtdThe mission of the Institute of Economic Affairs is to improve publicunderstanding of the fundamental institutions of a free society, by analysingand expounding the role of markets in solving economic and social problems.Copyright The Institute of Economic Affairs 2010The moral right of the author has been asserted.All rights reserved. Without limiting the rights under copyright reserved above,no part of this publication may be reproduced, stored or introduced into aretrieval system, or transmitted, in any form or by any means (electronic,mechanical, photocopying, recording or otherwise), without the prior writtenpermission of both the copyright owner and the publisher of this book.A CIP catalogue record for this book is available from the British Library.isbn 978 0 255 36645 8Many IEA publications are translated into languages other than English orare reprinted. Permission to translate or to reprint should be sought from theDirector General at the address above.Typeset in Stone by MacGuru Ltdinfo@macguru.org.ukPrinted and bound in Great Britain by Hobbs the PrintersThe author Foreword Summary Table 1 The theory of Fair Trade Introduction What is Fair Trade? Fair Trade: history and institutions Profile of Fair Trade sales and production Conclusions 2 Is Fair Trade free market? Introduction The individual consumer’s rational choice The individual producer’s rational choice Fair Trade: an alternative speciality market distributionchannel Fair Trade mainstreaming Conclusion 3 Benefits and detriments of Fair Trade Introduction 781113171719242732343435374143454747

Benefits of Fair Trade The gap: promotional claims and reality Some criticisms of Fair Trade Conclusion 4 Alternatives to Fair Trade Introduction Private social labelling initiatives The rise of corporate social standards Government-regulated social standards The proliferation of standards and labels raises manyquestions Fair Trade compared with other overtly sociallyresponsible business practice Fairtrade ‘absolutism’ Conclusion 5 Fair Trade as a long-term developmentstrategy for the global South Introduction Does Fair Trade really counteract the so-called socialproblems caused or revealed by international trade? Fair Trade and general economic development Agricultural trade liberalisation Conclusion 485261THE AUTHOR70737374808387909498101102Dr Sushil Mohan is an applied economist with research interests in issues relating to the interaction between agriculturalcommodity trade and economic development. He has publishedseveral papers on the problem of price risk faced by coffeeproducers in developing countries and how they can manage thisrisk. He has also published on the benefits for developing countries from reforming their agricultural trade. Sushil worked forover ten years at key levels in trade promotion agencies in Londonand India. He served as Consultant for the CommonwealthSecretariat for developing the coffee industry in the Republic ofVanuatu; as Board Member (1993–7) of the UK Tea Council, International Tea Committee and International Coffee Organisation;and in the Commerce Ministry of India dealing with trade policyand development.1041071111136 Conclusion 116References 119About the IEA 1347

forewordforewordThe success of the Fair Trade movement has created anintense debate in recent years. It has come under attack – especially from believers in free markets – for deviating from thepractice of free trade that has led so many people to emerge frompoverty in recent years. In turn, many of the proponents of FairTrade passionately denounce free trade and big business, despitetheir obvious contribution to reductions in poverty. This monograph is to be commended for taking a dispassionate look at thesubject. Indeed, it finds that this particular line of argument is adead end. Fair Trade arises from the free choices of producers andconsumers: it is therefore very much a niche part of the system offree trade. The basic principle of Fair Trade is that the organisations involved label products (such as coffee, bananas and so on)for which the producers fulfil certain conditions in the production process. These conditions generally include, for example, notemploying child labour. The producers also receive a premiumabove the market price for the product, as well as some form ofprice guarantee should the market price fall below a particularlevel. Consumers buy the products freely knowing that producersare being treated ‘fairly’. None of this deviates from the principles of free trade – even if it were the case that the choices thatconsumers make to buy Fair Trade products are misguided.Having established that Fair Trade products do not8intrinsically deviate from the principles of free trade, the authorthen moves on to examine the claims of Fair Trade’s proponents.This examination is justified – indeed overdue. The claims thatFair Trade activists make are strong; the public esteem for themovement is very high; yet there is hardly any serious empirical analysis of the movement’s claims. Indeed, even this studystops short of a detailed, comprehensive and conclusive analysisbecause the data simply do not exist to test the arguments of FairTrade advocates.The evidence that is gathered in this monograph, however,does show that the claims of proponents of the Fair Trademovement are probably exaggerated. There are many other waysin which the benefits that Fair Trade brings to producers canbe obtained – some of those ways have long been embedded inconventional trade. Furthermore, it is not clear that Fair Tradebenefits the poorest producers, and the administration and feesinvolved in becoming a certified producer are not trivial. Themain claims that the Fair Trade organisations make relatingto their ability to protect producers from price instability areexaggerated: few consumers will realise that, although there is aprice guarantee through Fair Trade, there is no guarantee of thequantity that can be sold at that price.At the same time, the author finds that the claims of FairTrade’s detractors are also exaggerated. Theoretical problemswith the model (for example, that it encourages overproduction)that are not serious problems in practice will often be brought up.Those who read this monograph hoping for a wholesaledenunciation of the Fair Trade movement will be disappointed.Rightly, the author concludes on the basis of the limited evidence.Nevertheless, the author’s nuanced position should itself be a9

fa i r t r a d e w i t h o u t t h e f r o t hhuge challenge to Fair Trade’s supporters. Fair Trade is not, theauthor finds, a long-term strategy for development; the objectivesof Fair Trade are often fulfilled in conventional markets; the FairTrade rhetoric is not generally justified; the costs for producers ofbeing involved in labelling initiatives are not inconsiderable; andthere are many other labelling initiatives with overt social object ives (such as the protection of rainforest). These other initiativesmay suffer as a result of attempts by the Fair Trade movement toensure that Fair Trade schools, parishes and so on use productswith the particular Fairtrade label as opposed to other labels.Overall, this monograph is an important contribution to adebate that tends to generate more heat than light. It is a longoverdue, dispassionate analysis of the Fair Trade movement.philip boothEditorial and Programme Director, Institute of Economic AffairsProfessor of Insurance and Risk Management, Cass Business School,City UniversitySeptember 2010The views expressed in this Hobart Paper are, as in all IEA publications, those of the author and not those of the Institute (whichhas no corporate view), its managing trustees, Academic AdvisoryCouncil members or senior staff.10Summary Fair Trade is part of the market economy and is not, in anyway, in opposition to free trade. Fair Trade sales have grownenormously in the last few years. Fair Trade brings certain benefits to producers, such asguaranteed prices, a social premium and the enforcement ofparticular labour conditions. These benefits may not be as great as many of Fair Trade’sproponents imply. For example, if the market price fallsbelow the guaranteed price level, though the guaranteedprice will be paid for any Fair Trade purchases, the quantityof produce that will be bought from the producer is notguaranteed. The benefits of Fair Trade also come at a cost. There is alevy on the wholesaler as well as a certification charge forproducers. The certification charge starts at 1,570 in thefirst year – a huge sum of money for producers in the poorestcountries. Fair Trade does not focus on the poorest countries. FairTrade penetration is greater in middle-income than in poorcountries. Criticisms of Fair Trade are also exaggerated. At its currentlevel of penetration it is likely to do little harm in terms ofdistorting markets.11

fa i r t r a d e w i t h o u t t h e f r o t h The benefits claimed by Fair Trade can also be obtained fromthe normal business relationships that exist between primaryproduct producers and buyers. Attempts by proponentsof Fair Trade to denigrate free trade and normal marketpractices are not helpful and distort realities. Primary product producers will often gain much more byselling speciality brands of their product than they will fromadopting the Fair Trade label. Many other social labelling initiatives exist with objectivesthat are different from and often more transparent thanthose of Fair Trade. Attempts by Fair Trade to requireschools, parishes and so on to stock Fair Trade goods candamage other social labelling initiatives or require very poorproducers to suffer the bureaucracy and costs of obtainingmultiple labels. Fair Trade is not a long-term development strategy, and themodel is not appropriate for all producers. It is also unableto address structural problems within trading systems. FairTrade’s proponents need to show some humility and acceptthat it is a niche market designed to benefit some producers;nevertheless, it does achieve that limited objective.12tableTable 1 Growth in sales of some Fair Trade products,2004–09 3213

Fair Trade Without the Froth

1 THE THEORY OF FAIR TRADEIntroductionThe growth of the Fair Trade1 market is both unique andcontroversial. Fair Trade products sell for a higher price thancom parable conventional products without delivering any extraphysical quality. The Fair Trade movement campaigns to growits market – sometimes in an aggressive way using the vehicle ofits staunch supporters. Fair Trade claims to address social andenvironmental problems and injustices exacerbated by conventional trading in global markets, and it tends to blame ‘unjust’market relationships for low commodity prices and the hardshipsendured by subsistence producers and workers in the developingworld. Fair Trade campaigning tends to convey the impression that its success is contingent upon increasing consumerawareness of what it would describe as the exploitative natureof conventional global trade and multinational corporations.Fair Trade enthusiasts participate in protests highlighting theseissues, though lately such protests have been diluted because1There is some difficulty in determining exactly how to use the term ‘Fair Trade’.In general, as this monograph will have an international audience, I will use theterm ‘Fair Trade’ to refer to a product certified by some kind of body which demands certain conditions of and/or makes particular guarantees to the producers of the relevant products. ‘Fairtrade’ will be used to refer to products certifiedby the Fairtrade Foundation in the UK.17